Harmony Gold Mining Co. (HMY, Financial) released its presentation on Sept. 8.
Harmony is a gold-mining and exploration company. The company has operations in South Africa and Papua New Guinea.
With this article I want to highlight the catalysts that made the share price of Harmony to increase with 161.59% during fiscal year 2016 (from July 1, 2015 to June 30) on the New York Stock Exchange.
The uplift of the share price of Harmony on the stock market during the fiscal year has been led by the following factors in particular:
- A 6% increase in the underground recovered grade from 4.74Ă‚ grams per tonne (g/t) in fiscal year 2015 to 5.02 g/t in fiscal year 2016. The miner plans to further improve the underground grade over the next three years to reach 5.29 g/t in 2019. This overall improvement in the underground recovered grade will increase the efficiency at operations in the Free State and West Rand provinces. This means that the miner will sustain less cost to extract one ounce from underground, increase the operating margin and will more easily reach the planned gold production targets in the future. Harmony aspires to grow its ounces to 1.5 million ounces at less than $950 per ounce over the period from fiscal year 2017 to fiscal year 2020, through organic growth and acquisitions. Between 80,000 and 115,000 ounces may come from Tshepong Phakisa and re-treatment of tailings in South Africa, but to get to the growth aspiration Harmony has to find an acquisition somewhere in South Africa, the rest of Africa or Papua New Guinea. The miner is looking for 1 million to 2 million ounces of reserves with a LOM of 10 years and that produces approximately 100,000 ounces per annum at an AISC of less than $950 per ounce.
- In fiscal year 2016 a net profit of 949 million South African rand ($64 million) was recorded compared to a net loss of 4.5 billion rand in fiscal year 2015; consequently, headline earnings amounted to 221 South African cents per share compared to a headline loss of 189 South African cents per share for fiscal year 2015.
In spite of the higher gold production reported by the miner in 2016, up 0.42% (from 1,077,466 ounces in 2015 to 1,082,035 ounce in 2016), revenue in U.S. dollars was lower due to a decrease in the average gold price received from $1,222 per ounce in 2015 to $1,169 per ounce in 2016. This was due to the fact that during the first half 2016 and the whole month of January, gold traded below $1,200 per troy ounce on the London Bullion Market.
The profitability of Harmony’s operations and cash flows generated by operations are affected by changes in the price of gold. The monetary policies announced or implemented by central banks, including the U.S. Federal Reserve Board, are the main factors in these changes. This means that the longer the Fed postpones the interest hikes, the longer the price of gold will trade at higher levels than cash cost of production and capital expenditure required to sustain the production.
Analysts at Standard & Poor's now forecast $1,300 per ounce for the remainder of 2016, $1,250 per ounce in 2017 and $1,200 per ounce in 2018. This means that Harmony is set to report higher operating income and CFO in 2017 and in 2018.
This is another factor that will positively contribute to increase the operation’s profitability and the CFO of Harmony and it is represented by a stronger U.S. dollar against the rand and the other non-U.S. currencies.
Since it seems that there is a negative correlation between gold price and rand/dollar, lower gold prices in 2017 and 2018 as expected by analysts at S&P will correspond to an appreciation of the dollar against the rand.
Graphic 1: Rand/dollar and gold price over the last 10 years
Therefore a depreciation of the rand against the dollar will reduce Harmony’s rand costs since most of the miner’s operating costs are incurred in rand and increase the overall net income.
- A 54% reduction in net debt to 1.08 billion rand. The debt reduction remains a priority for Harmony. The miner is determined to do so and sees itself as net debt free by the end of the calendar year. We should see a positive effect of it already in fiscal 2017.
- Dividend of 50 South African cents: The dividend was reinstated after about four years at Harmony. The payment of the dividend is a sign of a healthy company that is willing to reward its shareholders. Harmony should continue to pay dividends based on an improved outlook concerning the ability to generate positive cash flows and profits.
At the moment, the stock is trading below its price-to-book (P/B) value (P/B mrq is 0.87) and the Enterprise Value/EBITDA is 5.95.
Source: Harmony's Presentation: Gold miner with a growing copper portfolio
In South Africa, the company operates nine underground mines (in the provinces of Gauteng and Free State), one open-pit mine (in the North West province) and several surface operations (in the Free State province).
The company’s operations in Papua New Guinea that form part of a 50% joint venture with Newcrest include the Hidden Valley open-pit gold and silver mine, the Wafi-Golpu project and exploration tenements. In addition to its joint venture work, Harmony also has a 100%-owned exploration portfolio that focuses on prospective areas in Papua New Guinea.
Disclosure: I have no positions in Harmony Gold Mining.
